Pricing services to cover overhead expenses is one of the most difficult tasks of a service provider. If you undercharge for your time, you will have a difficult time meeting all your expenses and having a livable wage. If you overcharge, you may not be able to compete in the marketplace.
Carefully budget your expenses. Be sure to count travel time to and from meeting with your clients. Consider phone calls to the client, mail, fax paper, and the expense of an online service, if you communicate by e-mail to your clients.
Consider the kind of image your price conveys. If most service providers in your industry charge by the hour, but you charge a fixed rate, will customers think you will give them a rushed and shoddy job, or will they think you are more efficient or more experienced than other service providers? How will price influence perceived value?
Customers often think that the intangible qualities of a service, such as feeling good after a facial, are worth every penny. People seeking advice or consultation services are more likely to accept the advice if they have to pay for it than if it is free. Be sure to include image and perceived value considerations in your pricing strategy.
Set prices that will cover direct costs and indirect costs, and provide a profit. Indirect costs are your overhead or administrative expenses. Direct costs are labor and raw materials.
In a service business, direct costs are primarily the service provider’s wages. As you develop your pricing strategy, you need to decide how your price per unit – a unit being either each hour of service, or the entire, completed service – will cover direct costs, indirect costs, and profit.
If your business does not have a community or industry standard on which to base your prices, you can develop other methods to cover direct and indirect costs, including the multiplier method and the flat rate approach.
THE MULTIPLIER METHOD
Divide your total sales by annual labor costs. If you are a new business just starting out, you will need to estimate to get these figures.
THE FLAT RATE APPROACH
The flat rate is calculated by figuring a standard time to do the job, multiplied by an average wage rate, times a multiplier.
PROFESSIONAL SERVICES AND CONSULTANTS
Other methods to estimate your price include:
By hourly fee
By the professional’s required hourly income
People who purchase services have a slightly different buying psychology. The tangible and intangible benefits they are purchasing can carry a very different perceived value. Consider how customers might view its perceived value and what kind of expectations they take to the purchase decision.